Every year, the IRS releases the “Dirty Dozen,” a list of tax scams and schemes on which the agency is choosing to focus. In the crosshairs this year is abuse of business tax credits. Says the IRS, “Improper claims for the research and experimentation credit generally involve failures to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses.” So how is the research and experimentation credit, better known as the R&D credit, supposed to work? And what happens when business leaders get too slick about claiming it?
The R&D tax credit
If you’re a small-business manager, you know how it is. You try to come up with the most efficient processes and the most innovative products, but stopping to reconsider what your company has been doing takes time, people and money. That gives larger companies an unfair advantage. They have more people, which means they can create greater efficiency and grow even bigger.
But the R&D tax credit can make it possible for smaller companies to invest in research. It applies to any company that spends time and money on developing new products, improves the products it has, improves the processes or software it uses in manufacturing, creates patents or prototypes, or hires researchers, scientists and designers.
How it gets abused
In 2017, the Treasury Office of the Inspector General reviewed $53.8 million worth of R&D tax credit claims. They found that $11.8 million of them were potentially erroneous. Some of them were simply filed improperly, and some did not meet all the requirements for proper claims or didn’t have the proper documentation attached. That means those companies could be in trouble if they’re ever audited.
Improper claims can happen in a number of ways, but the best way to prevent them is to have your claim checked thoroughly by a tax professional whom you trust. Remember that the lowest possible tax bill isn’t the goal. Accuracy is. Also keep in mind that this article is just to highlight fraud issues. If you think you are eligible for a particular credit, discuss it with Edwards, Ellis & Associates before you decide whether it is appropriate.
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